Transcript National Defense

CHAPTER
23
National Defense
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
National Defense
In 1960, comprised half of federal
government spending
 In 1999, just over 16%
 Defense spending can be adjusted on the
margin

 Especially
expenditures to defend U.S.
interests internationally
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Level of Military
Expenditures
Table 23.1 Expenditures o n
Natio nal Defense as a
Percentage o f GDP
Year
Percent o f GDP
1945
41.0%
1950
4.8%
1955
10.5%
1960
9.4%
1965
7.2%
1970
8.1%
1975
5.5%
1980
5.0%
1985
6.3%
1990
5.4%
1995
3.7%
2000
3.0%
2003
3.7%
So urce: Calculated fro m data
in the Statistical Abstract of
the United States , vario us
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Marginal Benefits of
Additional Expenditures
Marginal Costs of Military = Marginal
Benefits
 MB decline as dollars are spent on less
vital items

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Marginal Benefits of
Additional Expenditures
The Optimal Level of
Military Expenditures
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Arms Race and the War on
Terror

What if reaction of other nations to
military spending is negative?
 Arms

race
Potential prisoner’s dilemma
 Incentive
to heavily arm
 End up worse off as result
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Arms Race and the War on
Terror
An Arms Race as a
Prisoners’ Dilemma
Game
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Military Alliances

Optimal sharing group may be larger than
one nation
 Economic
rational for alliances
 Example: NATO

Increased security also increases
propensity for war
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Economic Warfare

Arms races can cause major economic
problems
 Example:

Soviet Union during Cold War
Economic warfare can be used to
bankrupt an adversary
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Do Democracies Spend
Enough?
Military spending reduces current
consumption
 Might be investment towards future
consumption

 Example:

1991 war with Iraq
Democratic governments might be biased
towards short-term spending
 Leads
to inadequate military investment
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
23-10
Military Procurement
Contracts
How can contracts be written to purchase
uncertain items?
 Fixed fee

 Often

infeasible
Cost plus fixed fee
 Little
incentive to control costs
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Military Procurement
Contracts

Cost plus percentage fee
 Incentive

Cost plus incentive fee
 Limited

to overspend
applicability
The perfect contract
 Does
not exist
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Procurement Versus LifeCycle Costs
True cost is cost over life-cycle
 Two aspects relevant to military
expenditures

 Cost
of maintenance
 Cost of finishing a started program
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Conscription Versus
Volunteers

Advantages of conscription
 Lower
personnel costs
 Constant costs

Disadvantages of conscription
 Heavy
tax on conscripted
 Misallocates labor resources
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Conscription Versus
Volunteers
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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